Question

Present Value of Amounts Due

Assume that you are going to receive $280,000 in 10 years. The current market rate of interest is 5%, compounded annually.

a. Using the present value of $1 table in Exhibit 5, determine the present value of this amount compounded annually. Round to the nearest whole dollar.
$

b. Why is the present value less than the $280,000 to be received in the future?
The present value is less due to ______ over the 10 years.

Answer 1

a.

Future value = $280,000

Time (n) = 10 years

Interest rate (i) = 5%

Present value = Future value x Present value factor (i%, n)

= 280,000 x PVF (5%, 10)

= 280,000 x 0.61391

= $171,895

b.

The present value is less due to Interest over the 10 years.

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